Only 2 a and b a) Assume that a swap contract just had an interest payment calculated on a £20 million principal The three-months Libor rate observed 1

Only 2 a and b a) Assume that a swap contract just had an interest payment calculated on a £20 million principal The three-months Libor rate observed 1.5 months ago was 4.8% (quarterly compounded) and todays 1.5 months Libor and 4.5 months Libor are 4.9% and 5.1% respectively continuous compounded). If the swap contract matures in 4.5 months, calculate the value of the swap to the receiver of the swap rate (fixed term receiver). Assume that the swap pays Libor exchange for a 4.4% fixed rate quarterly compounded. What would happen to foxed term payer position (value of the swap) if interest rates increase? (10 marks) b) What is the CAPM beta of a combination of the stock portfolio and a short position in the stock Index futures contract that minimises the variance of the portfolio? Motivate your answer. (Full marks will be awarded for an analytical demonstration of the result.) (10 mark)